9911796707
TMI Blog2016 (9) TMI 1456X X X X Extracts X X X X X X X X Extracts X X X X ..... ng to assessment year 2008-09, is directed against the order passed by the Hon'ble Dispute Resolution Panel (DRP), Kolkata under section 144C(5) read with section 144C(8) of the Income-tax Act, 1961 dated 24.09.2012, which in turn arises out of an order passed by the ld. Transfer Pricing Officer (TPO), in his order No. IPO/II/Kol/92CA(3)/11-12/31 dated 31.10.2011 and an order passed by the ld. AO under section 144C/143(3) of the Income-Tax Act, 1961 (in short, the Act), dated 29.10.2012. 2. The facts of the case are stated in brief. Tega Industries Ltd. is a company engaged in the business of manufacturing of rubber, specializing in the design, production and application of water resistant rubber lining. During the financial year 2006-07, Tega India set up Tega (investment Ltd; Bahamas, an associated enterprise (AE) (therein referred to as Tega Bahamas) as a special purpose vehicle (SPV) in the Bahamas for undertaking an acquisition of companies based in South Africa, that is, to acquire, (1) Berue equipment Ply Limited; and (2) Bentod Manufacturing Limited. In order to acquire these two South African Entities, the assessee provided a shareholder loan to Tega Bahamas and a cor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sociated Enterprise (AE) Here it is appropriate to discuss whether transactions under consideration are international transactions and relationships between holding and subsidiary are that of an AE (Associate Enterprise). No doubt, the internal loan funding and guarantee fall in the meaning of international transaction as provided by section 92B of the Income Tax Act 1961, which reads as under: 'SECTION 92B : Meaning of international transaction. (1) For the purposes of this section and sections 92, 92C, 92D and 92E, "international transaction" means a transaction between two or more associated enterprises, either or both of whom are non-residents, in the nature of purchase, sale or lease of tangible or intangible property, or provision of services, or lending or borrowing money, or any other transaction having a bearing on the profits, income, losses or assets of such enterprises and shall include a mutual agreement or arrangement between two or more associated enterprises for the allocation or apportionment of, or any contribution to, any cost or expense incurred or to be incurred in connection with a benefit, service or facility provided or to be provided to a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... directly or indirectly, or through one or more intermediaries, in its management or control or capital, are the same persons who participate, directly or indirectly, or through one or more intermediaries, in the management or control or capital of the other enterprise. (2) For the purposes of sub-section (1), two enterprises shall be deemed to be associated enterprises if, at any time during the previous year,- (a) one enterprise holds, directly or indirectly, shares carrying not less than twenty-six per cent of the voting power in the other enterprise; or (b) any person or enterprise holds, directly or indirectly, shares carrying not less than twenty-six per cent of the voting power in each of such enterprises; or (c) a loan advanced by one enterprise to the other enterprise constitutes not less than fifty-one per cent of the book value of the total assets of the other enterprise; or (d) one enterprise guarantees not less than ten per cent of the total borrowings of the other enterprise; or" In this case the Tega Industries Ltd. holds, shares carrying not less than twenty-six per cent of the voting power in the Tega Investment Ltd-Bahamas and furnished guarantees n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ected CUP method as the most appropriate method and have not evaluated the applicability of the other methods. In order to identify comparables, a search for data on similar borrowings was performed on the followings websites: www.rbi.org.in, www.finmin.nic. w.w.w.india.infoline.com. www.securities.com www.oticsource.com and www.google.com etc. The borrowings identified on both the sources were then combined. The results of search conducted were added to the borrowings analysed till last year and accordingly a total of 381 transactions were analysed. The process of combination is summarized below: Particulars No. of Companies Borrowings identified on securities 75 Borrowings identified on one Source 207 Borrowings identified on Google 123 Borrowings identified on India infoline 3 Elimination of common borrowings appearing on all three websites 27 Total borrowings analyzed 381 The above stated data was analyzed and data such as amount of loan, period on loan, rate of interest etc. was collated thereafter, out of 381 borrowings analyzed, 361 borrowings were rejected on one of the following reasons: • Insufficient information specially pertaining to rate of inte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arm's length interest rate and offered the notional income on the same to tax while filing Form 3CEB and Return of Income. Based on the above facts the main issue before us is to see whether arm's length interest rate computed by the TPO is correct or not. The ld AR for the assessee stated before us that the shareholder's loan and guarantee were provided by the appellant as a substitute to equity funding to Tega Bahamas for furthering its own intent of acquiring the two South African Entities. Accordingly, the assessee classified the loan as performing a shareholder function, thus warranting no charge, and guarantee as shareholder service meriting be consideration. However, without prejudice to the contention of loan performing a shareholder function, the assessee offered LIBOR +100 bps as interest income to tax on the loan to Tega Bahamas. The assessee had also provided loans (interest free) to its AEs in Australia (Tega Industries Australia Pty Ltd.-Tega Australia) and USA (Tega Industries Inc.-TegaUS). However, at the time of documentation, the assessee, suo motu offered interest for such loans provided @ LIBOR + 100 hps) on the basis of a bench marking exercise ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ₹ 28,83,461/- would be the adjustment." 4.1 Aggrieved from the order of the TPO/AO, the assessee filed an application before the Hon'ble Dispute Resolution Panel (DRP). The Hon'ble DRP has also confirmed the order of the TPO observing the following: '5.1.13 The TPO writes in the remand report that in the case of a major or leading bank, the LIBOR represents the average rate for a given currency, at which it can obtain unsecured funding for a given period in a given currency. In other words, it represents the cost of funding for the hank. The spread or the additional basis points charged by the bank represent the price of the loan based on its estimation of the creditworthiness of the borrower the term of the loan and conditions associated with it including the currency and country risk, if any. However, in the present case, the arm's length price of the loan is to be determined in the hands of the assessee, a company, and not a leading bank. It follows that in its case, the LIBOR would have to be replaced by the cost of funds in the foreign currency involved in the hands of the company. On the other hand, the spread would have to be determined on the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re of the apprehension that the loan price so computed does not contain the term 'LIBOR' in it. This is only a misapprehension. An example can explain it. If the LIBOR for a particular date is 5% and the loan has been priced at 13.8% then the price in LIBOR is simply LIBOR + 8.8%. In case of a loan given by a bank which is not a participating bank in determination of the LIBOR if the risk spread is evaluated at 850 bps and its own notional cost of funds is LIBOR + 25 bps, then it may price its may price its loan at LIBOR + 875 bps. The loan pricing done in the Transfer Pricing Older closely follows the international norms as far as possible. We completely agree with the TPO and confirm the same. 5.1.16 In respect to the objection raised by the Assessee that the TPO has computed interest on loan given to Tega Bahamas for the whole year whereas loans outstanding for less than a year the TPO has given the reply in para 8.2 that the computation has been checked and if is seen that the Excel sheet has applied the formula for the whole year. The TPO is not very clear as to what does he mean by that. However, we are of the view that interest should be charged for actual period ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Opening Balance 01.04.2007 40.000 USD Repaid during the year 24.12.2007 (40,000) USD The assessee has benchmarked the transaction using CUP method as the most appropriate method (which has also been accepted by the ld. TPO to be the most appropriate method-(refer page 9of the order of TPO) to benchmark an arm's length interest rate for loans provided to its AEs. Rule 10B(1)(a) of the Income-tax Rules 1962 defines CUP method as under: "(a) comparable uncontrolled price method by which,- (i) the price charged or paid for property transferred or services provided in a comparable uncontrolled transaction, or a number of such transactions, is identified: (ii) such price is adjusted to account for differences. If any between the international transaction and the comparable uncontrolled transaction in between the enterprise entering into such transactions, which could materially affect the price in the open market: (iii) the adjusted price arrived at under sub-clause (ii) is taken to be an arm's length price in respect of the property transferred or services provided in the international transaction emphasis added." Even Australian Taxation Ruling 97/2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... urrency risk as the assessee has loaned funds in USD an is some cases in AUD. Country factor The assessee white considering ECBs borrowed by Indian companies, has adopted a conservative approach, as funds borrowed in India would have a greater country risk vis-a-vis funds borrowed in the countries in which the AEs of the assessee are located (Australia, USA and South Africa). A summary chain of the comparative analysis undertaken by the assessee has been provided below: Loans given to International Transaction Comparable County Currency Country Currency Tega Industries Ply. Ltd. (Australia) Australia USD/AUD India-has lower rating than Australia USD Tega Bahamas/South Africa South Africa USD India-has similar rating to South Africa USD Tega Industries Inc (USA) USA LSD India has lower rating than SA USD It is submitted that if a CUP is being applied for financing transactions with companies, the information relating to each of the associated enterprise, i.e. the country of the borrower, currency of the loan, credit rating of the borrower, fixed or floating nature of the loan and other key terms and conditions need to be factored. The said approach has be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y i.e. the assessee proceeded to determine its cost of funds rather than using a widely, used and globally acknowledged base such as LIBOR as the base rate for computation of an arm's length charge. 2 Not considering foreign currency cost of funds and instead adopting the assessee's weighted average cost of funds as the base rate for determining an arm's length charge The ld. TPO while selecting the assessee's weighted average cost of funds ignored an important parameter for undertaking comparability analysis i.e. currency risk. Without prejudice to our arguments, regarding incorrect application of method by the ld. TPO and rejection of comparable transactions identified by the assessee, the ld. TPO erred in not accepting the assessee's foreign currency cost of borrowed funds. 3 While determining the credit rating of the assesses, the ld. TPO selected certain ratios while ignoring others. The ld. TPO cherry-picked two of the seven ratio's recommended under the S&P model for arriving at the AE credit rating. 4 Arbitrary adjustments to the credit rating arrived at based on the ratios selected by the ld. TPO for reducing the credit rating. The ld. TPO ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ate indicators Depending on the case it may be appropriate to add a margin to these rates to reflect the credit standing of the borrower and the risk associated with the loan." Therefore, the ld. TPO has erred by taking the assessee's cost funds as base rate for imputing an arm's length interest rate for loans provided to its AE's. Further, the ld. TPO during the transfer pricing audit, has utilized the S&P Model for undertaking the credit rating exercise. However, while undertaking the credit rating process the ld. TPO erred in the methodology adopted and in doing so computed an additional charge on the guarantee and loan provided to Tega US and Australia. The errors committed by the ld. TPO while undertaking the credit rating exercise have been produced below: "(1) The Ld TPO has taken the assessee to be the tested party and inadvertently applied CPM method to compute the arm's length rate of interest; (2) In considering the assessee to be the tested party, the ld. TPO has taken the assessee cost of funds to be the base rate instead of DBOR. (3) Further, the TPO in assessing the creditability of the AEs has used the S&P Criteria in a biased and u ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ebt (%) 68.27 AA 3.00 5 Total debt/EBITOA(x) 1,08 AA 4.00 6. Return on capital (%) 36.12 AAA 4.00 7. Total debt/total debt - equity (%) 40.33 BBB 8.00 Total score 19.00 S&P's Overall Rating AA As can be seen from the above facts that credit rating of Tega Australia and Tega US are BBB and AA respectively, vis-a-vis 'BB' and 'BBB' as computed by the ld. TPO. Further, the ld. TPO has on the basis of inadequate understanding of the S&P Rating guidelines further downgraded the rating that was arrived at on the basis of size and scale considerations. The relevant extract of the S&P Credit Module has been provided below for your ld. Panel's consideration. "Standard & Poor's has no minimum size criterion for any given rating level. However, size turns out to be significantly correlated to ratings. The reason size often provides a measure of diversification, and/or affects competitive position. Small companies also can possess the competitive benefits of a dominant market position, although that is not common. Obviously, the need to have a broad product line or a national marketing structure is a factor in many businesses and wou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... de ratings have particular upgrade potential. Many more defaulted overtime than achieved investment grade. Oil exploration, retail, and high technology companies especially have been vulnerable, even though their great potential was touted at the time they first came to market." Based on the above literature, it can be seen that there is no reference to the ld. TPOs contention that the credit rating for smaller companies would require to be downgraded. Hence the ld. TPG has erred by downgrading the AEs ratings based on these their small scale of operations. For identification of the uncontrolled loan agreements the assessee followed a scientific approach. To initiate the search process, the relevant characteristics of the international transaction were identified based on which similar loan transactions were searched for on the database. The key characteristics identified were: Particulars Strategy Proposed (Australia) Strategy Proposed (United States) Borrower Region Australia United States Deal Active Date 1 April 2007 to 31 March 2008 1 April 2007 to 31 March 2008 Status Phase Completed, Mandated Completed, Mandated Deal Amount Less than 10 million USD/AUD ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... method. Considering the healthy financial position of Tega Australia and Tega US, the assessee charged a rate of interest which was equivalent to LIBOR plus 1 per cent. Thus it is humbly submitted before the ld. Panel that the adjustment proposed by the ld. TPO he quashed and the arm's length price as determined by the assessee be accepted. In spite of the above cited submissions by the assessee, the ld DRP has confirmed the order of TPG. Being aggrieved from the order of the Dispute Resolution Panel, the assessee is in further appeal before us. 4.2 The ld. AR for the assessee has vehemently submitted before us that with respect to provision of interest tree loan to Tega US and Tega Australia, the assessee humbly submits that it has undertaken an interest benchmarking study applying CUP as the most appropriate method in its TP study report and determined the arm's length interest rate to be LIBOR plus 100 bps. The relevant para of transfer pricing study (TP-Study Report) as cited above, proves this fact. The ld. TPO during the course of the hearing proceedings rejected the assessee's approach by stating that for determining the arm's length interest rate on loan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ices) itself should be tested. The loan instrument and the rate of interest should be tested on different parameters (as applicable) to look for similar comparable uncontrolled loan instrument which has similar circumstances as of the international transaction. For benchmarking the interest rate on loan, either an internal CUP or an external CUP in the same priority of application could have been applied in a case. An internal CUP could be applied where same/similar transactions (i.e. with same/similar terms and conditions) have been entered into by the appellant/AE with third parties. If no internal CUP is available, an external CUP could be looked at i.e. transactions entered outside the group between third parties under same/similar terms and conditions. To illustrate, if the price charged in the open market for a particular type of product could be say INR 100. In order to manufacture that product a person incurs a cost or INR 105 or INR 60. The market pays INR 100 only as the market price is INR 100 and not INR 105 or INR 60 i.e. the cost incurred by him. In order to benchmark the transaction under CUP method, a comparable price should be considered which is being charged by o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ted that the ld. TPO has followed a biased and unscientific manner of deriving the credit rating which has led to commit the following errors: (1) The ld. TPO has only placed reliance on four out of seven ratios as prescribed by the S&P Criteria to arrive at the credit rating for AEs even after acknowledging the fact that S&P prescribes all seven ratios. Considering, the above mentioned flaw in the ld. TPO's approach the appellant undertook the credit rating process on a suo motu basis placing reliance on the same S&P Criteria as referred by the ld. TPO. The steps to determine the credit ruling by the assessee were as under: (1) Pursuing the financial statement of Tega Australia and Tega US for computation of all seven ratios as prescribed by the S&P Criteria to arrive at the credit rating. (2) Evaluating the rating arrived with sovereign rating to cap the same as any company rating could not be more than its country sovereign rating. The credit rating methodology as adopted by the assessee provided the 'BBB' rating for Tega Australia and' AA' for Tega US. (Submission before DRP dated 14 June 2012, Page 313 to 320 of the paper book) The ld. TPO has furth ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed as BBB. The appellant has further undertaken a search on I.oan Connector database for the said ratings to identify comparable uncontrolled US and AUD denominated loan instruments. The same was determined to have a credit spread of 72.68 bps. over and above the base rate respectively for US and AUD denominated loans. As assessee had charged interest at the rate of 100 bps over the base rate, the same could be considered to be at arm's length. In determining the quantum of spread that a B rated bond or company would command over and above its base rate for the risk associated with the loan transaction, the ld. TPO has identified a single loan transaction as comparable from 'Loan Connector' having 'B' rating commanding a spread of 3% for the risks associated with its rating. Following evaluation of credit rating for the purpose of determining arm's length guarantee charge and interest rate for provision of guarantee and loan, the ld. TPO then identified a single loan transaction as comparable from 'Loan Connector' having B rating and commanding a spread of 3% for the risks associated with its rating. First of all, any search for instruments bearing ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... see has charged interest rate @Libor plus 100 bps. Thus, the transaction has been undertaken at arm's length price, and therefore the addition proposed b\ the ld. TPO be set aside. Regarding Credit Spread the ld AR for the assessee has submitted that the ld. TPO mentioned that the same needs to be based upon the creditworthiness of the borrower, citing detailed explanation about credit rating, the agencies determining the same and Standard & Poor's Corporate Rating Criteria as provided by them in a booklet issued in 2006 (S&P Criteria). However, the ld. TPO erred in applying the same in a biased manner and came to a conclusion that the rating of Tega US and Australia would not be more then 'B'. Following the approach as provided in S&P Criteria, the ld. TPO moved on to arrive at a credit rating of Tega US and Tega Australia for computation of credit spread. The ld. TPO assigned a credit rating of 'B', following a biased and unscientific application of S&P criteria, and determined 300 bps as credit spread to be applied on base rate. The assessee would humbly like to highlight that the ld. TPO has followed a biased and unscientific manner of deriving the cr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t for itself, 'Analyst driven rating' would obviously require input and experience of an analyst to factor in for subjective economic factors. As the appellant, itself, and ld. TPO are not the experts of the subject matter, the evaluation of credit rating should only be based upon quantitative factors as mentioned in the S&P Criteria. Thus, the approach of the ld. TPO to assign a uniform B rating to Tega US and Tega Australia comprises of fallacies and the biased approach. b. Further, as already mentioned by the appellant that rating methodology by S&P is based on manual computation of ratios thereby leaving a scope for human intervention and manipulation, the appellant would also like to submit the credit rating report generated from Moody's RiskCalc software for Tega US and Tega Australia as part of additional evidences (Page 8 to 20 of Additional evidences) which provides rating through use of computer base algorithm vis-a-vis manual compulation of ratios. The appellant pleads to consider the same for avoidance of any scope for manipulation. On perusal of the said credit rating report it has been determined that Tega US could be rated as Bal (Page 8 to 15 of Ad ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... en also 28 instruments of US denominated loans could be identified with a mean credit spread of 144 bps (page 27 to 30 of additional evidences) for benchmarking interest rate of Tega US and single instrument denominated in AUD could be identified with a mean credit spread of 52 bps (Page 37 to 38 of Additional evidences). Thus, this evidences the fact that single instrument of 300 bps is an erroneous conclusion drawn by the ld. TPO on facts and circumstances of the case and should be disregarded by your Honours. Further, the appellant would also like to submit herein that the US and Australian entities are 100% captive subsidiary of the appellant and undertakes distribution of appellant's products in US and Australian markets. Thus, these subsidiaries were of high importance to appellant for expansion of its business in key global markets and could be considered as 'core' subsidiaries. The appellant has provided them with working capital loan, payable on demand and for the purpose of evaluation of arm's length interest rate, credit rating of appellant for FY 2007-08 could be considered appropriate for identifying comparable loan instruments. The appellant rating f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... order to manufacture that product a person incurs a cost of INR 105 or INR 60. The market pays INR 100 only as the market price is INR 100 and not INR 105 or INR 60 i.e. the cost incurred by him. With respect to credit spread, the ld. TPO mentioned that the same needs to be based upon the creditworthiness of the borrower, citing detailed explanation about credit rating, the agencies determining the same and Standard & Poor's Corporate Rating Criteria as provided by them in a booklet issued in 2006 (S&P Criteria). However, the ld. TPO erred in applying the same in a biased manner and came to a conclusion that the rating of Tega US and Australia would not be more then 'B'. The ld. TPO has only placed reliance on four out of seven ratios as prescribed by the S&P Criteria to arrive at the credit rating for AEs even after acknowledging the fact that S&P prescribes all seven ratios. ld. TPO has identified a single loan transaction as comparable from 'Loan Connector' having 'B' rating commanding a spread of 3% for the risks associated with its rating therefore, we find that the methodology adopted by the TPO may be wrong. However, the assessee has submitted ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... orporate guarantee is very much identical to the business of the assessee and hence, the same cannot be compared to a bank guarantee of the bank or financial institution. In view of this matter, we hold that no TP adjustment is required in respect of corporate guarantee transaction done by the assessee company 37. It is seen that it has not been brought to light (hat the corporate guarantee provided by the guarantor is in the nature of provision of service. Further, in any way. it has a bearing on the profit or losses of the Transacting parties. On both grounds, it is covered under section 92B of the Act, Neither this nor the OECD Guidelines or international vast law referred above appears to have been brought to the notice of the Hon'ble Tribunal. 38. The Hon'ble Supreme Court has laid out on many occasion that an issue decision has been discussed in detail in a judicial pronouncement if cannot make good law. In the case of Shanmugavel Nadar v. State of Tamil Nadu (263 TTR 658), the Apex court has pronounced the following: "Rup Diamonds v. Union of India. AIR 1989 SC 674 is an authority for the proposition that apart altogether from the merits of the grounds for r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... est rate available to the subsidiary in the market-place is also not available. 41. It has already been mentioned while analysing loan pricing that credit rating is not an exact science. In the present case as has been shown above, the subsidiary can be rated at CC level. Such ratings are in the nature of 'very high credit risk' It has been shown that TILB should be charged a margin of 600 bps, However, it has been charged a margin of 225 bps This difference is required to he shared between the guarantor and the borrower in an arm's length situation. However, the bargaining power of TILB vis-a-vis the assessee is minimal in an arm 's length situation. Thus, 250 bps could he safely considered the price of the guarantee. 42. Based on the above, it is held that the assesses should have charged a Guarantee commission at the annual rate of 2.5% on the amount of credit availed by the subsidiary which was guaranteed by it. The loan amount stood at ₹ 3,60,39 150-as on 31-3-2008 Accordingly, the guarantee fee is computed at ₹ 9,00,97/- Thus, the total income of the assesses is to be upwardly adjusted by this amount.' 5.1 Aggrieved from the order of the T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... benefit has accrued in the AE which in case third party had rendered such service it would have charged the price for the same in Transfer Pricing two related parties are viewed as unrelated and transacting at arm's length This being the cardinal principle, for this service the Assessee should also charge the price as two unrelated parties transacting at Arm's length do. In this background if we see what is the structure of the international transactions entered into by the Assessee with the AE, we find that they are interest free loan and Corporate Guarantee given to ICICI UK bank on behalf of the AE this is the structure of the transactions then the assessee must charge interest on loan and Guarantee fee from AT. If Assessee does not do so it leads to erosion of tax base as third parties charge interest and fees for such services Therefore this Panel holds the view that the TPO was right in making adjustment in the TP Order on this account. There is no scope in our view to restructure the international transaction of interest free loan as Shareholder service or quasi-equity. Restructuring should be the judicious discretion of the Tax Administration and it could be applie ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... guidelines, notes or circulars to interpret the arm's length principle for different nature of transactions", the assessee has "placed reliance on guidelines, notes and circulars available across different jurisdictions dealing with the arm's length principle for cross-border financing arrangements. v. The assessee is of the view that as the purpose of setting up of Tega Bahamas was to facilitate the acquisition of the South African entities, its expectation from the loan funds provided to Tega Bahamas and the guarantee provided for the third party borrowings of Tega Bahamas was not to earn an interest income or a guarantee fee. The assessee believes that in a third party scenario no entity would have lent any funds to Tega Bahamas given its skewed debt - equity ratio evident from its balance sheet and thus, the basis of providing funds to Tega Bahamas was as an investment and not as loan. Thus, it would be appropriate to classify the funds loaned and guarantee provided to infuse third party funds as quasi-equity in nature and as a shareholder service meriting no consideration. vi. The assessee has referred to UK Manual INTM 501010 issued by 'IMRC' wh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... end, reference has been made to ATO's Taxation Ruling TR92/11. It has been mentioned that the TPO has relied on this Ruling issued by the Australian Taxation Office to reject the arguments of the assessee, However, the assessee has cited the full Ruling and suggested that clauses (c) (d) and (g) of paragraph 60 of the Ruling allows for recharacterisation of loan as equity. xiii. It is mentioned the TPO has rejected the arguments of the assessee by storing that 'thin capitalisation' rules are not provided in Indian legislation. The assessee has stressed that thin capitalization rules stem from the arm's length principle and they were "introduced across the world to cheek lopsided capital structures that were employed by multinational corporations to enable profit extraction from their AEs in the form of interest". The assessee has referred to HMRC INTM 542005 where it has been mentioned that thin capitalization is a form of transfer pricing." Based on the above, the ld.AR for the assessee has submitted before us that the TPO's determination of arm's length price of the guarantee fee is erroneous. Ld. AR also submitted that assessee's e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gned ALP adjustment of ₹ 2,23,62,603, thus stands deleted. As ITAT do so, however, ITAT must add that, in ITAT considered view, the way forward, to avoid such issues being litigated and to ensure satisfactorily resolution of these disputes, must include a clear and unambiguous legislative guidance on the transfer pricing implications of the corporate guarantees as also on the methodology of determining its ALP, if necessary. Of course, no matter how good is the legislative framework, the importance of a very comprehensive analysis, in the transfer pricing study, of the nature of corporate guarantees issued by the assesses, can never be overemphasized. The sweeping generalizations, vague statements and evasive approach in the transfer pricing study reports, which are Quite common in most of the transfer pricing reports, cannot do good to a reasonable cause. When judicial calls on the complex transfer pricing issues are to be taken, utmost clarity in the legislative framework and a comprehensive analysis of relevant facts, in the transfer pricing documentation, are basic inputs, unfortunately, both of these things leave a lot to be desired. ITAT can only hope, and ITAT do hope, ..... X X X X Extracts X X X X X X X X Extracts X X X X
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